Wednesday, October 11, 2023

Failing Once, Failing Twice: What Makes Firms Search for Radical Improvements?

Cynics would say that firms don’t look for opportunities as much as they should. Instead, it is problems that generate search for improvements. The cynics would be right – what we call problemistic search, triggered by disappointing profits, is a real thing and it is more frequent than search for opportunities. That is bad enough, but actually things are worse.

Research by Thomas Keil, Evangelos Syrigos, Konstantinos Kostopoulos, Felix Meissner, and PinoAudia published in Journal of Management shows that multiple goals complicate things even further. This is because problemistic search can be replaced by self-enhancement. Executives and organizations engaged in self-enhancement do not solve problems, but instead they look for reasons to claim that there is no problem to solve. Chief among these reasons, I mean excuses, is finding a secondary goal that shows higher performance.

Does this happen? There is ample experimental evidence that individuals self-enhance when given the opportunity. This research is novel in showing that organizations can self-enhance in response to very important goals, and self-enhancement has important consequences.

Pharmaceutical companies rely on drug approvals for their profits, so having drugs pass the late stages of the approval process is a primary goal. They also need a good research pipeline, so drugs moving through early-stage approval is a secondary goal. How to get many drugs and novel drugs? A key decision is whether to search in the proximity of their current expertise, or whether to move into new disease areas and acquiring candidate drugs from other firms. Proximate search is safe but is a questionable strategy for a firm with low performance. Distant search is riskier but is the way to renew a firm with low performance.

What the firms should do in response to low performance is trivially simple. If the internal research is good, stay with it and do a proximate search. Otherwise do distant search. The good news from the research by Keil and coauthors is that the pharma firms behave exactly like that. They turn to distant search when the performance from the current search is low.

There is also bad news. They do this only when seeing disappointing performance on both the primary goal and secondary goal. Disappointing performance on the primary goal – the most essential one – is not enough to trigger distant search. Even worse, doing poorly on the primary goal and well on the secondary goal produces less distant search than doing well on both goals. For the sake of firm profitability, and for society getting necessary medicines, this is very problematic.

Self-enhancement is something we can understand and accept when we see it in individuals. It is a slightly childish thing to do, but people want to preserve their self esteem and want to look good in their own view, and that of others. Better than they deserve, even.

It is much harder to understand and accept self-enhancement by firms. Firms exist for practical reasons. They produce products and services, they develop improvements in products and services, and being good in actuality is much more important than being adept at self-enhancement. Unfortunately, this research is a reminder that there is self-enhancement in firms too. No doubt this is because the managers and executives of firms are people too, and the firms are lacking processes that control their individual self-enhancement.

Keil, T., E. Syrigos, K.C. Kostopoulos, F. D. Meissner, P. G. Audia. 2023. (In)Consistent Performance Feedback and the Locus of Search. Journal of Management forthcoming.